Photo by Tanya Dusett on Unsplash
Disclaimer: I am not a professional financial advisor. All financial opinions written in this article are from my personal research and experience, and it is not a recommendation to buy or sell the stocks.
For the past few weeks, I’ve been researching fossil fuel energy and renewable energy. There has been an agreement between countries that they want to reach net-zero carbon emission in 2050 by transitioning fossil fuel energy to renewable energy.
Indonesia, as one of the top coal exporters in the world, has begun to be concerned about how long coal will stay relevant in the energy market. As an investor, we also need to understand it as well coal’s position in the market.
The below writings are collections of what I’ve read and summarized from IESR report (https://iesr.or.id/en/agenda-iesr/indonesia-energy-transition-outlook-ieto-2022) and the global outlook report (https://www.iea.org/analysis). Please read their report for a complete analysis.
Net-Zero Emission Plan
Initial net-zero emission plan
Despite its status as an archipelago country vulnerable to climate change, Indonesia is lagging in its goal of achieving net-zero emissions by 2050. Due to a number of impediments, the plan was even postponed until 2060 (explained later on).
Indonesia aims to reduce greenhouse gas (GHG) emissions by 29 percent (voluntarily) or 41 percent (with international support) by 2030 compared to the business-as-usual scenario in its Nationally Determined Contribution (NDC). However, the current NDC falls far short of what is required to meet the Paris Agreement.
The Tipping Point
The key point here is the goal of reaching the tipping point for coal and other fossil fuels in 2030, as well as the coal retirement program in three sectors (power, transport, and industry). This plan appears to be quite ambitious for Indonesia, which heavily relies on coal for energy production.
Renewables plan by 2030
To achieve the tipping point, Indonesia needs to see this in 2030:
- Half of the electricity is sourced from renewable energy (RE)
- Solar PV needs to grow 10–11 GW/year. RE capacity needs to grow 14x
- Phasing out coal from 2025 to 2040
- Electric vehicles: 60% electric motorcycles & 10% electric cars in-vehicle market.
But can Indonesia achieve this? Let’s see the energy supply and demand outlook.
Current Energy Supply & Demand
Energy supply and demand
The share of Renewable Energy (RE) in the primary energy mix has only reached 11.2 percent, while the target of 23 percent for 2025 makes it more difficult to achieve.
Coal remains appealing as a primary raw material, especially with the price skyrocketing from Q3 to Q4 2021, driving up coal production and exports to other countries.
Furthermore, power plants will still become the primary emitter in the energy sector in 2021, with over 4,600 MW, and the majority of these power plants will continue to rely heavily on coal.
Investment on Decarbonization
Energy Investment realization
One of the reasons for the lack of a transitional phase is the low level of investment in renewable energy sectors.
Current renewable capacity falls far short of the 2030 target. Indonesia would need to invest ten times more than the current government target.
The inclusion of nuclear and new energy (coal gasification) in both the energy sector and renewable energy law creates a distraction. Both technologies are considered “immature” by the country.
Better regulatory and policy frameworks, as well as increased participation of all stakeholders in the energy transition, are required in Indonesia.
Fossil Fuel Transition
Fossil Fuel Transition
Fossil Fuel Transition
Coal production is still strong in Indonesia. In 2015, reached 461 million tons to more than 600 million tons in 2021.
IEA predicts that global coal demand will decline by 9% in 2030, and 50% in 2050 if all countries fully implement their announced climate pledges as of mid-2021.Somehow I doubt they will fulfill their pledges on time.
Index Coal price & DMO price
Coal set a new record high at around $215/tonne in November 2021. This was driven by increased demand from China & India. Coal shortages were further worsened by Chinese policy that banned coal imports from Australia (2nd largest coal exporter).
Local price capped at $70/tonne has made Domestic Market Obligation (DMO) hard to achieve. Coal mining companies prefer to export their coal. As a result, only 46% of the 137.5 million tonnes of coal DMO quota in 2021 had been fulfilled.
Lately, in March 2022, Coal reached a new high record at $400/tonne! This actually posed a risk to businesses, for government and industries to start seriously considering other energy alternatives.
Electricity Generation Sector
Sector Emissions & RE installed capacity plan
The electricity generation sector is crucial for making decarbonization to reach the zero-net target. This sector accounts for 40% of total emissions in the energy sector.
Coal contributes more than 60% of electricity generation, followed by Gas and Oil.
The above scenario will only work if Renewable Energy (RE) also keeps improving at the pace reflected on the chart.
Additionally, as one of the top coal exporters in the world, I think it's hard to reduce coal usage that fast. With rising coal prices and no near-foreseen strict regulation has been made.
Fossil Fuel Investment
Fossil Fuel & Renewable Energy Investments
One of the reasons why Coal is still popular is because the investments in Fossil Fuel still at large.
Renewable Energy (RE) investments have never exceeded $2b in the past six years. While Fossil Fuel keeps increasing until 2020 when a pandemic happened.
IEA study shows that Indonesia needs at least $19–23b of investments to reach its zero-net target.
Reducing Fossil Fuel: Coal-Fired Power Plant (CFPP) Retirement
Energy Transition Mechanism (ETM)
Considering the urgency of CFPP retirement, ADB has established a new mechanism called the Energy Transition Mechanism (ETM). Under this mechanism, Indonesia, the Philippines, and Vietnam will be offered financial assistance from ADB to early retire their coal fleet. A pilot project has been planned for five to seven CFPPs in these three countries.
ETM will help CFPP owners avoid major financial losses due to early retirement. There are two types of funding provided through the ETM.
- The carbon reduction fund will disburse cash and equity sourced from interested investors to CFPP owners.
- The clean energy fund is used to provide financing and technical assistance to the three countries. It is worth noting that ADB restricts the use of ETM only for renewable energy development.
This plan has seen some contradictions. Stated in the news:
Indonesia’s state-owned utility says it would begin closing down coal-fired power facilities in 2020 and phase them out entirely by 2055. But at the same time, it is constructing 21 GW of new coal plants with an operating life of till 2065, a contradiction that activists claim weakens the coal phase-out strategy.
The mixed message is the latest from a government that continues to lavish generous subsidies and incentives on coal miners and power plant operators despite the lack of a unified policy on clean energy transition.
Reducing Fossil Fuel: Emission Trading System (ETS)
Emission Trading System (ETS)
Another government solution with a shaky resolution. Only 32 CFPP applications were received out of a total of 84 eligible participants.
The government did not set goals for the number of participants, the total amount of carbon transactions, or emission reductions from this pilot project.
Reducing Fossil Fuel: PLN (State Electricity Company) Plans
CFPP Utilization Plan
PLN has 2 strategies in place to achieve carbon neutrality by 2060:
- Coal will be phased out beginning in 2030.
- Utilizes renewable energy, nuclear power, and coal, as well as Carbon Capture, Utilization, and Storage (CCUS)
However, the second scenario should be reconsidered. Building a nuclear power plant is expensive, CNCC (China National Nuclear Corporation) admitted that the cost per kWh of their proposed small modular reactor (SMR) is 1.5x higher.
Aside from the financial aspect, there is also a technical consideration. A series of delays and irregular design certifications have plagued pilot projects in Argentina, China, and Russia.
Reducing Fossil Fuel: PLN Replacing Diesel Power Generator (DPG)
DPG Conversion Map
PLN has 3 phases in converting DPG with RE:
With a capacity of 225 MW, Phase 1 Solar PV+BESS will replace DPGs in 200 secluded, underdeveloped locations (PLN, 2021a). The replacement will include 660 MWp of solar PV and 1.8 GWh of BESS. The project’s auctions are expected to begin in 2021, with a completion date of 2023/2024.
Phase 2, PLN will replace DPGs with equivalent capacities of 500 MW and 1300 MW, respectively (Kompas, 2021). The auctions for the second phase are set to begin in 2022, with a COD date of 2024/2025.
Phase 3 will be auctioned in 2022/2023 and completed in 2025/2026.
However, PLN plans to replace Diesel Generators (DPGs) with renewables experienced a delay.
So far, Indonesia has made a good plan to achieve net-zero emissions, but the actual realization did not appear to be as good as projected.
There are numerous challenges that must be overcome if Indonesia is to achieve its goal. It is necessary to reduce investment in fossil fuels while increasing investment in renewable energy. Furthermore, a more serious commitment to government policy and regulations is required to accelerate the phase-out of fossil fuels.
Aside from phasing out coal, another action that can be taken is to accelerate the development and adoption of renewable energy.
In the following post, I’ll discuss the advancements made in one of the fastest-growing renewable energy sources in Indonesia, which is Solar energy.
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